To make ethanol, you want to make vinegar first, according to ZeaChem.

The biofuel start-up, which has moved from Colorado to Silicon Valley, says it has come up with a method of making cellulosic ethanol that results in close to 40 percent more fuel per ton of wood chips than competing processes. By 2010 or so, the company hopes to be producing ethanol commercially for 80 cents a gallon at wholesale. That could translate to anywhere from $1.10 to $1.50 at the pump, depending on a host of factors.

How does it work? Most cellulosic ethanol producers convert cellulose into ethanol in somewhat of a direct manner. Wood is separated into three principle ingredients--cellulose, hemicellulose, and lignin. The cellulose and hemicellulose are then converted into alcohol through biological fermentation (for instance, microbes and enzymes) or thermochemical engineering, which can also be combined with biological fermentation.

Click here for the ZeaChem video.

Mascoma, which was spun out of Dartmouth, is one of the more notable biological companies, while Range Fuels, which uses a process akin to the coal-to-liquids process, is known for thermochemical conversion. The alcohol harvested from fermentation is then concentrated through distillation.

Traditional fermentation and thermochemical processing, however, typically give off carbon dioxide as a byproduct, according to James Imbler, CEO of ZeaChem. It's why beer has bubbles.

ZeaChem takes an indirect route. After separating the cellulose, hemicellulose, and lignin, it employs a microbe to convert cellulose and hemicellulose--which can account for 61 percent of the material in wood--into acetic acid, the signature ingredient of vinegar, rather than alcohol. The conversion into acetic acid does not give off carbon dioxide, leaving more carbon in the fuel.

Meanwhile, the company cooks the lignin to extract hydrogen. The hydrogen is subsequently combined with the acetic acid to produce ethanol. Two-thirds of the energy in the ethanol comes from the acetic acid, while one-third comes from the added hydrogen, said Imbler, which is similar to the ratio of initial molecules from the wood. In a sense, the company is blowing apart wood and reforming it as an alcohol.

Like nearly everyone else in the cellulosic ethanol business, ZeaChem hasn't proven its method works on a large scale yet. The company has shown lab results and is mapping out plans for 100 million-gallon-a-year processing facilities. (See a video of a tour of their labs here.) Other cellulosic companies will also likely tout higher gallons per ton figures than ZeaChem gives them credit for. (We contacted some, but have not heard back yet. We'll update you when we do.)

The fact that ZeaChem does seem to know what to do with its leftovers makes the process interesting. Fuel, Imbler asserts, is a commodity. In a commodity market, suppliers can't control the price, he said. Thus, the only way to survive is to adopt efficient processes and keep raw material costs low.

How come this company came up with it? It's a cross pollination between biological and thermochemical know-how. The founders, biochemists, came from Coors while the rest of the bulk of the management team comes out of the petrochemical industry.

Unlike some other ethanol start-ups, ZeaChem won't try to rely on garbage or waste products for feedstocks. It is cutting deals with poplar tree farmers to buy trees. The company's processing plants will be located near existing poplar farms that themselves are located near rivers for easier shipping.

The company employs one species of microbe to perform the conversion process. It's a fairly common species that required no genetic modification and can be found in manure, the guts of termites, and other lovely places.

"Anything that falls on the ground it will eat," said co-founder Dan Verser.

Verser further added that similar microbes can be used to produce different types of fuel. If the ethanol market doesn't take off, ZeaChem can switch to butanol or some other fuel--just like you might change an ingredient in salad dressing.